Consider the Regression Equation: R_i − R_f = G₀

question 27

Multiple Choice

Consider the regression equation: r_i − r_f = g₀ + g₁b₁ + g₂s²(e_i) + e_it
Where:
R_i − r_f = the average difference between the monthly return on stock i and the monthly risk-free rate
B_i = the beta of stock i
S²(e_i) = a measure of the nonsystematic variance of the stock i
If you estimated this regression equation and the CAPM was valid, you would expect the estimated coefficient, g₀, has to be

• A) 0.
• B) 1.
• C) equal to the risk-free rate of return.
• D) equal to the average difference between the monthly return on the market portfolio and the monthly risk-free rate.
• E) None of the options are correct.

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Definitions:

GDP

Gross Domestic Product represents the overall market value of all end products and services made inside a nation over a certain timeframe.

Economic Stimulus Package

A package of economic measures put together by a government to stimulate a floundering or stagnant economy and help it recover.

Impact Lag

The time taken between the implementation of an economic policy and the occurrence of its intended effects on the economy.

Federal Budget Deficit

The scenario in which the spending of the federal government surpasses its income within a specific fiscal year.